SNB Hikes 25bps, Norges Bank Hikes 50bps

Stocks are having a tough time this morning after central banks extended their recent hawkish spree. Switzerland and Norway raised rates - the latter by more than expected -  and the BOE looks set to hike even more than consensus, as Britain’s red-hot inflation sours the outlook. Turkey is expected to raise aggressively as policymakers move to shore up confidence. Meanwhile, Jerome Powell - whose semiannual testimony on the Hill continues today, this time before the Senate - suggested yesterday the Fed’s on course for two more hikes this year.

A closer look at what happened earlier in the session:

• The Swiss National Bank (SNB) hiked the policy rate by 25bp to 1.75% today, in line with consensus expectations. The SNB revised down its 2023 conditional inflation forecast markedly, but revised up the 2024 and 2025 inflation rates on the back of second-round effects, imported inflation, and rent and electricity prices. Goldman keeps its expectation for one more 25bp hike in September, but lower its terminal rate expectation to 2% from 2.25% previously.
• Norges Bank’s Monetary Policy Committee voted unanimously to raise the policy rate by 50bp to 3.75%, above consensus and market expectations, stepping up the hiking pace again compared with their prior hikes this year. The Committee guided that “if developments turn out as we now expect, the policy rate will be raised further in August”. Norges Bank's policy rate forecast has been revised up and now indicates a terminal rate around 4.2% in the autumn (compared with 3.6% previously). Given today’s guidance, Goldman retains its expectation for two further 25bp hikes in August and September, taking the forecast of the peak policy rate to 4.25%, compared with 4% previously.

Main points:

1. The Swiss National Bank (SNB) raised the policy rate by 25bp to 1.75%, in line with consensus expectations. The Monetary Policy Assessment (MPA) kept the statement that additional rate hikes "cannot be ruled out". The press release also left the language around FX interventions unchanged, continuing to highlight that the SNB remains "willing to be active in the foreign exchange market as necessary". In the press conference, Chairman Jordan suggested once more that further monetary tightening is needed, but given the SNB's progress in tackling inflation a step down in pace could be justified, especially in light of FX interventions helping to keep inflation subdued, too.

2. Exhibit 1 shows the new conditional inflation forecast, which was revised down in 2023, but upwards in 2024 and 2025 on the back of second-round effects, imported inflation, and rent and electricity prices (-0.4pp to 2.2% in 2023, +0.2pp at 2.2% in 2024, +0.1pp to 2.1% in 2025). The SNB expects Swiss GDP to grow around 1.0% this year, unchanged from March, noting that the services sector gained momentum and the labor market remains robust. Looking ahead, the SNB expects that the loss of purchasing power due to inflation and restrictive financial conditions will dampen growth in the second half of the year.

3. Given the SNB's willingness to intervene in FX markets, and today's MPA noting that some of the 2023 inflation weakness was caused by the strength in the Franc, Goldman expects the SNB to continue to lean more on FX interventions to control inflation, especially given today's step-down in the hiking pace. In light of this and Chairman Jordan's comments suggesting that, prior to today's hike, there were at most two further hikes planned, the bank expects a final 25bp hike in September, but lowers its terminal rate estimate to 2% from 2.25% previously.

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4. Norges Bank’s Monetary Policy Committee voted unanimously to raise the policy rate by 50bp to 3.75%, above consensus and market expectations, stepping up the hiking pace compared with their previous 25bp hikes. The Committee guided that “if developments turn out as we now expect, the policy rate will be raised further in August”. Norges Bank's policy rate forecast has been revised up and now indicates a terminal rate of around 4.2% in the autumn (+ 0.6pp since March, Exhibit 2). The Committee sees two-sided risks around the policy outlook: a weaker Krone or persisting economic pressures might require a higher policy rate, while a faster decline in inflation or a more pronounced slowdown in the Norwegian economy might require a lower rate.

5. The updated economic projections in the Monetary Policy Report (MPR), also published today, show meaningful upward revisions to inflation and, to a lesser extent, to growth. The MPR noted that mainland GDP growth has been a little lower than projected in March, and Norges Bank now expects mainland GDP to grow by 1.2% in 2023 (+0.1pp vs. the March MPR). Equally, higher wage growth and a weaker Krone pushed up inflation projections; Norges Bank now expects headline CPI inflation of 6.0% for 2023 (+1.1pp vs. March) and 3.9% for 2024 (+0.6pp vs. March). CPI-ATE is now expected to reach 6.3% in 2023 (+0.7pp vs. March) and 4.6% in 2024 (+0.8pp vs. March). Wage growth was revised up 0.4pp to 5.5% in 2023 and by 0.3pp to 4.7% in 2024, with the MPR noting that underlying inflation "is likely to remain elevated longer than envisaged earlier".